House of Representatives

Petroleum Resource Rent Tax Assessment Amendment Bill 2006

Second Reading Speech

Mr Dutton (Minister for Revenue and Assistant Treasurer)

I move:

That the bill be now read a second time.

This bill principally amends the Petroleum Resource Rent Tax Assessment Act 1987 to implement a range of changes and improvements to Australia's primary offshore petroleum taxation system. The changes will take effect from 1 July 2006.

The petroleum resource rent tax, or PRRT, is a tax on net income derived from all petroleum projects in Commonwealth offshore areas excluding the North West Shelf project area. It is assessed on a project basis and the liability to pay PRRT is imposed on a taxpayer in relation to its interest in the project. This liability is based on the project receipts less project expenditures.

Undeducted exploration expenditure is allowed to be transferred from a non-paying PRRT project to a PRRT paying project, provided that continuity of ownership of both projects is maintained.

The amendments reduce compliance costs, improve administration and remove inconsistencies in the Petroleum Resource Rent Tax Assessment Act 1987.

Furthermore, the changes are consistent with the government's overall approach to taxation reform directed at simplifying Australia's taxation system and making the Australian taxation system internationally competitive.

Schedule 1 of the bill requires taxpayers to transfer and deduct transferable exploration expenditure when calculating their PRRT quarterly tax instalment.

Currently, PRRT taxpayers can only transfer and deduct exploration expenditure at the end of the year of tax. Consequently, companies often 'overpay' PRRT in the first three instalment quarters, only to receive an adjustment for this overpayment in the fourth quarter.

An interest charge will be applied at the end of the year of tax if any unusable amounts of transferable exploration expenditure are claimed in the quarterly instalments. The interest charge is designed to recoup the time value of money associated with the delay in the payment of tax.

Schedule 2 of the bill allows internal corporate restructuring within company groups to occur without losing the ability to transfer exploration expenditure between the petroleum projects of group members.

This measure removes a taxation distortion in the PRRT which prevents a company group from adopting the most efficient corporate structure. This taxation distortion results in company groups maintaining inactive companies, merely to protect their future ability to transfer unused exploration expenditure. The amendments will only apply to internal corporate restructures that occur on or after 1 July 2006.

Allowing internal corporate restructuring to occur under the PRRT without incurring a tax penalty is consistent with the approach adopted for income tax purposes.

Schedule 3 of the bill allows the present value of expected future expenditures to close down an infrastructure facility associated with a particular petroleum project to be deductible against the PRRT receipts of this project. This change is made to the extent that these costs are currently not recognised for PRRT purposes.

This change removes a taxation impediment preventing existing project infrastructure to be used efficiently. The efficient use of existing infrastructure will enable the optimal development of Australia's limited petroleum resources.

Schedule 4 of the bill introduces the self-assessment regime for PRRT taxpayers as it generally applies under income tax. This change will result in PRRT taxpayers being able to fully self-assess their PRRT liability.

Further, it enables PRRT taxpayers to obtain legally binding rulings from the Australian Taxation Office in relation to PRRT matters. At present they can only obtain administratively binding advice. This change provides greater certainty for PRRT taxpayers.

The government has recently implemented a number of reforms to the income tax self-assessment regime. These reforms arose from the government's Review of Aspects of Income Tax Self Assessment. Schedule 4 of the bill introduces these changes, where applicable, into the PRRT regime.

Schedule 5 of the bill introduces several unrelated amendments to the PRRT. There are three primary amendments.

First, payments of fringe benefits tax will be a deductible expense for PRRT purposes, provided such payments are not indirect costs which are excluded expenditures for PRRT purposes. Deductibility of payments of fringe benefits tax for PRRT purposes is consistent with the income tax treatment of these payments. Second, vendors disposing of an interest in a petroleum project will be required to provide a transfer notice to the purchaser of this project, setting out relevant information such as the amount of undeducted expenditure available.

This measure is designed to overcome the information asymmetry that exists between parties to a PRRT transaction, and is expected to ease compliance costs for the purchaser. Finally, the lodgment period for PRRT annual returns will be extended from 42 days to 60 days. This measure will ease compliance costs for PRRT taxpayers.

Full details of the measures in the bill are contained in the explanatory memorandum.

Debate (on motion by Mr Griffin) adjourned.